THE MEDIA BUSINESS: ADVERTISING

THE MEDIA BUSINESS: ADVERTISING; I.B.M. TO TRANSFER ADVERTISING WORK TO SINGLE AGENCY

By STUART ELLIOTT

Published: May 25, 1994

I.B.M., in the largest shift in advertising history, unexpectedly announced yesterday that it would dismiss more than 40 agencies it has worked with around the world and move its entire account to a single shop, Ogilvy & Mather Worldwide. I.B.M., one of the world's biggest marketers, spends $400 million to $500 million annually on advertising.

The decision stunned Madison Avenue and is expected to reverberate for months. The changes were made without notice, so abruptly that in a couple of cases, some work by the agencies being dismissed has yet to appear. For most of the agencies, the losses are serious and might necessitate layoffs. In a couple of instances, they are potentially devastating.

At the same time, Ogilvy, which produces ads for brands like Pond's cold cream, Kimberly-Clark paper products, Shell gasoline and Duracell batteries, is expected to add staff. Ogilvy, one of the world's largest advertising agencies, was founded in New York City in 1948, where it continues to maintain its headquarters.

Advertising executives were also startled because the size of the account being united is more than twice as large as any previous consolidation, which have become increasingly common as more companies look to simplify their sales messages. A big account for an agency is usually a tenth the size of I.B.M.'s.

I.B.M.'s decision comes as the company tries to become leaner and more aggressive in a computer industry that it once dominated, making significant streamlining moves such as revamping its marketing force and laying off employees.

The decision, which takes effect a week from today, means that I.B.M. will call on a single agency to create campaigns for the I.B.M. brand, as well as all company products and services, in 144 countries.

"The customer is primarily looking to I.B.M. for seamless, easy solutions that tie products together and solve problems," said Abby K. Kohnstamm, vice president for corporate marketing with the International Business Machines Corporation in Armonk, N.Y. "So it made sense to have a coordinated presentation of ourselves as a company that fits together." Ogilvy, though it had no previous relationship with I.B.M., was judged to be "very experienced in building and leveraging powerful global brands," she added.

This would be new for I.B.M., since even its best-known ads of the past, featuring an actor who impersonated Charlie Chaplin's "little tramp" and the cast of the television sitcom "M*A*S*H," were intended primarily to sell specific products rather than to establish a unified image.

I.B.M.'s decision is emblematic of three trends that are remaking the advertising industry. One is the huge, abrupt changes in account assignments since 1990, as economic difficulties have transformed consumer behavior. Shoppers, tempted as never before by lower-priced products offering quality and value comparable to brand names, have become tougher to sell to and more cynical about the industry's penchant for puffery.

As a result, familiar blue-chip brands have moved about with dizzying speed. Some recent examples are the Burger King and Hardee's fast-food chains, the Jeep-Eagle division of the Chrysler Corporation, Diet Coke and Subaru of America.

A second trend is the desire among so-called global brands, products sold around the world, to consolidate assignments, the better to reap benefits of efficiencies and effectiveness. Advertisers that have combined accounts at a single agency, or handful of agencies, include the Colgate-Palmolive Company and Reebok International.

The I.B.M. advertising changes are symptomatic of a systemic overhaul of the company being undertaken by Louis V. Gerstner Jr., who became its chairman and chief executive in April 1993. Mr. Gerstner, who previously worked at RJR Nabisco and the American Express Company, is recentralizing many of I.B.M.'s corporate functions.

Mr. Gerstner, in a speech on March 24, said one of his strategies for reviving I.B.M. would be to capitalize on "our size and scale to achieve cost and market advantages." Indeed, several advertising executives said the changes were, in effect, symbolic of Mr. Gerstner's new broom.

Finally, the I.B.M. changes embody the importance of personal relationships in advertising -- or as one agency executive who does not work for I.B.M., speaking on the condition of anonymity, put it: "People are comfortable working with the people they are comfortable working with."

In this instance, two top executives of I.B.M. worked with Ogilvy when they were at American Express. One was Mr. Gerstner. The other was Ms. Kohnstamm, whom he hired a year ago yesterday from American Express as vice president for corporate marketing. Ogilvy is the lead worldwide agency for American Express.

Ms. Kohnstamm said that the experience she and Mr. Gerstner had with Ogilvy, particularly in working with Rochelle (Shelly) Lazarus, now the president of Ogilvy's North American operations, was "a plus."

"But it really was not a major factor in our decision," she said, adding that a team of seven senior I.B.M. advertising executives determined that Ogilvy was "a marketing partner with overriding multinational capabilities that could pull us together globally but also can work locally."

The I.B.M. decision was clearly a huge boost for Ogilvy, which has lost many large accounts like Hardee's. I.B.M. became one of Ogilvy's three largest clients, raising the agency's total worldwide billings, the ad spending on which agencies earn commissions, to $6.2 billion to $6.3 billion from $5.8 billion. Ogilvy will also be assigned what I.B.M. called "a substantial amount" of its direct marketing activities in many countries.

"No matter what life cycle you're in as a company, this is a watershed event," said Charlotte Beers, who joined Ogilvy in 1992 as chairwoman and chief executive to revamp the agency -- not unlike Mr. Gerstner's mission at I.B.M. Ms. Beers said that Ms. Lazarus would be "at the center of the core team" formed to handle the I.B.M. account, but said it was too soon to discuss how many additional employees Ogilvy would hire.

To work for I.B.M., Ogilvy will resign two accounts with billings estimated at $75 million: product advertising for the Microsoft Corporation, and the Compaq Computer Corporation's European account.

Those assignments could now be pursued by the agencies that were notified late Monday night or early yesterday morning that they were losing I.B.M. accounts. Every one, without exception, was shocked.

"It's absolutely unbelievable," said Parry Merkley, the president and creative director of Merkley Newman Harty, a small New York agency that was named to share the I.B.M. personal computer account in October with the Paris office of DDB Needham Worldwide. Merkley Newman's print ads for the IBM PC Company began running only last week -- and the television commercials are still in production.

"If they choose to consider the PC Company as part of a global strategy, the changes make sense," Mr. Merkley added. "But I'm still very surprised it happened like this." Merkley Newman lost billings estimated at $50 million, reducing the agency's accounts to $45 million, or less than half their former size.

Keith L. Reinhard, chairman and chief executive at DDB Needham Worldwide in New York, and a man not given to superlatives, called the consolidation "amazing." His agency also lost about $50 million in billings.

Two other New York agencies, Wells Rich Greene BDDP and Lintas Worldwide, are being hit hard because the I.B.M. losses follow departures of other large clients.

"We were taken by surprise because our relationship with I.B.M. has been terrific," Kenneth Olshan, chairman and chief executive of Wells Rich, said. The agency has created image advertising for I.B.M. Wells Rich, Mr. Olshan said, handled the equivalent of $40 million to $50 million in billings. The trade publication Advertising Age estimated that figure at $75 million.

Kenneth L. Robbins, chairman and chief executive of Lintas Worldwide, said that he believed the I.B.M. changes were "very consistent with a company in transition."

"But Lintas knows the business intimately in many countries," he added, "and we could have saved them some time and money" rather than hiring an agency that has not worked for the company. Lintas Worldwide's I.B.M. billings totaled $85 million to $90 million, he said; Advertising Age estimated them at $150 million.

Another large agency dismissed was the J. Walter Thompson Company, though the loss to its parent, the WPP Group P.L.C. of London, was mitigated by the fact that WPP also owns Ogilvy. Thompson's lost billings were estimated at $25 million.

Some small accounts of I.B.M.'s, primarily involving direct catalogue sales of products to consumers, were not affected by the decision, nor were the company's agencies in Japan or those working for joint ventures.